'Next chapter of growth': WestJet buying up to 20 Boeing Dreamliners with eye on Asia and Latin America

CEO Gregg Saretsky dismissed concerns that WestJet was taking on too much risk simultaneously expanding into ultra-low-cost and luxury markets

WestJet Airlines President & CEO Gregg Saretsky holds a model of the Boeing 787 Dreamliner after the purchase of this airplane was announced at the company's annual general meeting in Calgary, Alta. on Tuesday, May 2, 2017.

WestJet Airlines is expanding its international reach with the purchase of at least 10 Dreamliner aircraft from Boeing Co., part of a larger strategy that will see the Calgary-based airline look for growth in both ultra-low-cost and longer-haul segments.

WestJet announced Tuesday that it is scheduled to receive 10 Boeing 787-9 Dreamliners between the first quarter of 2019 and December 2021, and has an option to buy an additional 10 airplanes to be delivered between 2020 and 2024.

The purchase of the wide-body, longer-route jets — which are more fuel-efficient than the Boeing 767 — will allow the company to serve new destinations in Asia and South America, as well as expand its European service.

“Growth is still an important component of our future, but that growth now has to come from further afield,” president and chief executive officer Gregg Saretsky said in an interview, pointing to WestJet’s initial expansion of service to Europe three years ago.

“This is the next phase of that chapter of growth… these planes will both replace the old 767s that we started this journey on and give us longer legs to fly longer haul missions into places like Asia and Latin America.”

While it gears up to expand its international reach, WestJet is also preparing to launch an ultra-low-cost carrier (ULCC). Details about product offerings and fare levels have yet to be released, but Saretsky said the branding will be distinct and separate from WestJet, and the ULCC would be similar to that offered by EasyJet and RyanAir in Europe.

Saretsky also said the purchase of the Dreamliners — which will be funded from cash from operations with no additional net debt — is an opportunity for the company to diversify revenues.

“As an airline with 40 per cent of our capacity to, from or within Alberta, there is absolutely no way to avoid the hit that comes from a market that has shrunk by a billion dollars when you’re so heavily over-indexed,” Saretsky said on a call with analysts Tuesday morning.

“We are to some degree dependent on Alberta coming back, but we are moving assets away from Alberta, and certainly the wide body, into markets where we think there are opportunities to drive the (return on invested capital) to 13 to 16 per cent.”

Chris Murray, an analyst with AltaCorp Capital Inc., said he is cautious on the introduction of the wide-body fleet, due to capacity management and cost concerns.

“We still struggle to see the economic rationale of the wide-body strategy in any form that brings them into a different part of the space where perhaps they don’t have a more competitive offering,” he said.

“Part of the challenge is getting a lot of return to justify the capital.”

Saretsky dismissed concerns that WestJet was taking on too much risk simultaneously expanding into ultra-low-cost and luxury markets.

“While some are expressing concerns that this represents perhaps execution risk expanding at both ends of the spectrum at one time, ultimately it’s in service of creating great value for guests, whether their flying short, medium or long-haul travel,” he said.

In a note released Tuesday, Macquarie analyst Konark Gupta wrote that he was encouraged by the order of 10 Dreamliners for further international expansion.

“Boeing 787 has been highly successful at WestJet’s main domestic competitor, Air Canada, and should drive (cost per available seat mile) significantly lower while enabling revenue growth opportunities,” he wrote.

Gupta also estimated that net capital expenditure could increase by at least $650-million over several years starting in 2017 as a result of the new purchasing order.

WestJet announced a 45-per-cent drop in net profits in the first quarter Tuesday, on the back of higher fuel costs. Fuel costs per litre were up from 47 to 64 cents, an increase of 36 per cent. Aircraft fuel was WestJet’s largest operating expense, up 42 per cent to $245.6 million, from $166.4 million the same time last year.

Westjet reported profits of $48.3 million, or 41 cents per share, down from $87.6 million, or 71 cents per share, one year earlier.

Revenue per available seat mile, a measure of airline efficiency that divides operating income by carrying capacity, increased 2.3 per cent from a year earlier to 14.5 cents after eight straight quarters of decline. Cost per available seat mile (CASM), a measure of how much an airline spends to fly passengers, also increased 7.8 per cent per cent to 13.4 cents.

WestJet ended the day down 3.24 per cent to $22.10 on the Toronto Stock Exchange.